Saturday, April 16, 2011

Rodrik Talk at the World Bank- 'a liberal mugged by globalization'

A few years ago we were in El Salvador, an economy which has done a tremendous amount in terms of liberalizing its economy, privatizing, stabilizing. Nothing essentially wrong that you can point to in terms of the contractual legal environment. It wasn't the government that was just hell-bent on taxing everything. Quite the opposite. And nothing except for garments had taken off; and garments had taken off because of some special trade privilege in the U.S. market, but nothing except for that. You ask people: If I give you $25 million, what would you invest in in the Salvadorian economy, and they would think about it a little bit and then they would say: Well, can I put it in Miami? Do I have to invest in El Salvador? That's the kind of economy where, when you don't see any Schumpeterian rents--we forget. When we think about Schumpeterian rents, we think it's just about rich countries. Rich countries: Schumpeterian rents are important for innovators, because they get a new product and they need to ensure they have at least some profits from investing in those high risk activities. But in developing countries too there are unique Schumpeterian rents for investors willing to go into new areas, new industries. Capital likes to get a return. Exactly. And when it's risky and when there are huge spillovers to the rest of the economy, the private return is going to be way below what the social return is, so you are not going to get the right kind of transformation. In that kind of a setting it's not government failure that's blocking transformation. It's just a bunch of market failures associated with low levels of income. And there you do want the government to come in and actually do some stimulating